Some Long-Term-Care Insurance Is Better Than None

Ruffenach: Why shooting for the moon with long-term-care insurance might shoot you in the foot.

By

GlennRuffenach

The best is the enemy of the good. Or so said Voltaire, the French philosopher. I could be wrong, but...I think he was talking about long-term-care insurance -- and how to fix what is probably the biggest hole in your plans for retirement.

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This all came to mind after I read a recent "retirement and health" poll by the Harvard School of Public Health. Researchers found that more people age 50-plus now recognize the likelihood of needing long-term care as they age (which is good) but that they have no idea how to pay for it (which is bad). According to a MetLife study, a home health aide charges $21 an hour, on average; assisted living can set you back around $3,500 a month. Yes, you can try to self-insure, but many nest eggs will be hard-pressed to finance retirement alone, much less long-term care. You might think Medicare will be your safety net, but the program only covers short-term stays tied to illness or injury -- not assisted living or nursing-home care. And the Class Act, the federal program designed to offer long-term-care coverage directly to the public, was scuttled last fall.

Which brings us to Voltaire. His notion -- that the best solution can make a good solution seem less beneficial than it actually is -- explains why many people turn their backs on long-term-care insurance. (Nearly 15 percent of individuals over 60 have coverage, according to a recent report.) Typically, financial advisers and insurance agents push us to buy the best coverage possible: policies with hefty daily payouts (at least $200) that will cover years (and years) of care. Their intentions, for the most part, are good -- but the "best" option is expensive. Depending on your age, annual premiums can easily reach $4,000 or more. The result: We decide against buying any protection at all.

Don't let your search (or an adviser's clamoring) for perfect coverage prevent you from considering policies that are simply good. Indeed, we choose good frequently in our lives -- in cars and investments, to name two. When it comes to long-term-care insurance, options other than the so-called best can do more for you and your family than you might realize.

I recently spoke with John Manchester, 60, who runs a packaging business in Hartland, Mich. His mother died several years ago at age 80, after spending time in an assisted-living facility and a nursing home. Before she became ill, in her 60s, her children purchased a long-term-care policy -- for about $1,700 a year -- that provided $50 a day for life, once a claim was filed. That coverage, when coupled with his mother's savings, paid for her care without exhausting her estate. "Would we have liked having more than $50 a day?" Manchester asks. "Absolutely. But that money kept us from getting into a serious downward spiral with her assets."

Protection? No Thanks

More than 85 percent of Americans 60 years and over are without long-term-care insurance. According to a recent poll of those who decided against it, here's why:

37%: Will rely on self or family to pay for long-term-care expenses

28%: Believe Medicare or Medicaid will pay for care

22%: Don't know how they will pay for care

9%: Believe other health insurance will pay

4%: Other

Sources: LifePlans; National Bureau of economic research

Or consider something slightly more ambitious. I asked Bill Comfort, who heads Comfort Assurance Group in St. Louis, to price policies providing $100 a day for three years with a 3 percent compound inflation rider to help keep pace with rising costs. The premiums -- from Prudential, Transamerica, Genworth and United of Omaha -- averaged just over $1,500 a year for a single individual age 60, and just under $2,400 for a couple the same age.

Of course, some financial advisers will dismiss $100 a day, and a 3 percent inflation rider, as being hopelessly inadequate. (The average daily rate for a private room in a nursing home is $240.) But $100 might be sufficient -- and affordable -- for some. That coverage ($36,500 a year) could be just enough to supplement your particular nest egg if you need care. "A Mercedes might be the best car on the highway," Comfort says, "but a Malibu with cloth seats still has a five-star safety rating."

None of this is to say that long-term-care insurance is the answer to all our prayers. The product itself remains ridiculously complicated, and the industry has often been its own worst enemy. In particular, steep premium increases in recent years on existing coverage have unnerved would-be buyers. But Dawn Helwig, a principal and consulting actuary at Seattle-based Milliman, says the worst of the hikes may be over. The reason: Pricing today is based on different assumptions. First, she notes, insurers are now using more realistic "lapse rates" (the odds of people dropping their coverage before using it) than in recent years. Second, carriers have more experience with how, and how long, policyholders actually use their benefits. And last, insurers now expect returns of about 4 percent on reserves, making investment shortfalls (and thus, premium hikes) less likely.

But the point is not just that some coverage is better than none. It's better only if it can meet your particular needs when the time comes. Claude Thau, a specialist in long-term care at Target Insurance Services in Overland Park, Kan., says he typically recommends coverage of at least $150 a day, with 5 percent compound inflation coverage. But, he notes, some people can benefit from policies that pay out, say, $100 a day -- if that coverage is part of a well-thought-out plan. Such a figure, Thau notes, could buy four to five hours of home care daily. "That's huge," he says. "Think of the benefit to a spouse or caregiver if their burdens are reduced."

And that's the point: designing a reasonable and affordable policy to meet your specific needs. Planning for long-term care is just common sense. Regrettably, "common sense is not so common." I wish I had said that. But Voltaire did.

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